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The US dollar slipped against the yen after the Bank of Japan held off from taking fresh steps to curb bond market volatility, while Asian shares sagged to a fresh 2013 low as China growth worries and continued uncertainty over the US. bond-buying programme depressed sentiment.
The Bank of Japan kept monetary policy steady and held off on taking further steps to curb any future spike in bond yields on Tuesday, judging that the recent market turbulence has yet to pose severe damage to the economy's recovery prospects.
The decision nudged up the yen against the dollar and weighed on Japanese equities as investors, who had expected fresh steps from the BOJ to stem bond market volatility, recalibrated their trading positions.
The Nikkei average fell 0.7%, and the dollar declined 0.4% against the yen to 98.33 yen.
Japanese government bond yields had spiked recently and were hit by volatile trading after the BOJ launched its radical stimulus measures on April 4.
The Nikkei has also had a torrid time over the past couple of weeks. It soared 4.9 % in its best day since March 2011 the previous session, after briefly entering bear market territory on Friday. The index hit a 5-1/2 year high last month.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo, said BOJ chief Haruhiko Kuroda "may also have thought there's no need to be too nervous about the market volatility, hoping to determine more the effect of the BOJ's bond-buying programme for the time being."
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> shed 0.9 % to a fresh 6-1/2-month low for a fifth straight day of declines, which would mark its longest losing streak in nearly three months.
FED STIMULUS CONCERNS
Solid US. jobs data and the Standard & Poor's raising the rating outlook of the US. to stable from negative on the back of an improved economy kept alive speculation about an eventual softening of the Fed's strong commitment to quantitative easing even as few saw any imminent policy shift.
Global equity and commodity markets have been jolted recently by the Fed stimulus concerns, slowing growth in China, a deep slump in Europe and turbulence in Japanese stocks and bonds.
Gary Yau, strategist at Credit Agricole, said in a note to clients that markets overall were hampered by "lingering uncertainties."
Elsewhere, Australian shares bucked the trend to inch up 0.1%, resuming trading from a holiday on Monday, while South Korean shares tumbled 1 % and Hong Kong slid 1.1%. Chinese markets remain closed for a holiday.
Analysts said the jitters over the Fed's outlook underscores some of the drawbacks of the quantitative easing policy.
"It shows the cost of the QE policy, which boosts liquidity and exacerbates moves in financial markets, while having a very slow follow through in the real economy," said Adrian Foster, head of financial markets research for Asia-Pacific at Rabobank International in Hong Kong.
Before the recent setback, Japanese equities enjoyed a record-breaking rally and the yen tumbled to multi-year lows against the dollar on the back of Prime Minister Shinzo Abe's sweeping growth-spurring measures.
Before the latest pullback, the dollar reached a high of 99.29 overnight after the S&P's rating move reduced the risk of the world's biggest economy losing its AA-plus rating.
Last month, the US. currency hit a 4-1/2-year peak of 103.74 against the yen, underpinned by the BOJ's massive stimulus.
Market players largely maintain their view for the dollar's longer-term uptrend.
"We are USD-bullish due to the ongoing Fed tapering debate which has steepened the US. yield curve ... Long-term capital flows are now directed towards US. corporates, which is USD-positive," Morgan Stanley said in a research note.
"Japan's bond volatility has declined, allowing the authorities to return their attention to equity markets and JPY," it added.
Worries about slackening demand from the world's leading consumer China have weighed on the commodity-sensitive Australian dollar, which fell to a 20-month low of $0.9393 on Monday. The Aussie was at $0.9426 on Tuesday.
US crude futures inched up 0.1% to $95.84 a barrel and Brent eased 0.1 % to $103.82.
Spot gold was down 0.2% at $1,383.91 an ounce, as the S&P's move on the US. credit outlook hurt bullion's safe-haven appeal.
European stocks fell and Wall Street ended nearly flat, as investors reassessed equity valuations after US. stocks hit record highs and European shares marked multi-year peaks recently, making current levels less attractive than earlier this year and raising doubts about a sustained rally from here.
